Friday, January 17, 2014

Downward’s Pricing Theory in Post-Keynesian Economics: Chapter 2

Chapter 2 of Paul Downward’s Pricing Theory in Post-Keynesian Economics: A Realist Approach (Cheltenham, UK, 1999) deals with methodological issues in Post Keynesian economics, and I will not go into too much detail here.

(2) the “Babylonian” or “pluralist” approach of Sheila Dow, which can be construed as a variant of (1), and

(3) Paul Davidson’s “generalising” methodology.

I myself see the Post Keynesian method as generally “realist” and heavily empiricist, although I increasingly see some merit in Karl Popper’s Critical Rationalism, and Popper’s ontological ideas.

At any rate, Downward sees critical realism – as in the work of Sheila Dow and Tony Lawson – as the basis for his methodological approach (Downward 1999: 11).

Critical realism, according to Downward, makes uses of induction, deduction and retroduction (Downward 1999: 12), and it is supposed to provide an “open system” approach to the study of phenomena in the social sciences, as opposed to the “closed system” approach of neoclassical economics, which sees events as having causes that are constant and unchanging and which relies heavily on deduction and formal axiomatic reasoning (Downward 1999: 15). In essence, this “closed system” method is appropriate for the natural sciences, but highly questionable when carried over into the social sciences (Downward 1999: 15–16).

For example, the theoretical core of neoclassical economics with its “closed system” approach assumes the following:

(1) rational agents (in the sense of having consistent transitive rankings of preferences);

(2) who are well informed;

(3) who strive to maximise ordinal utility;

(4) and who act in a system that has tendencies to coordination and equilibrium. (Downward 1999: 16).

For Downward, the essence of the realist “open system” approach is to reject these assumptions and to argue that they do not apply to the real world (Downward 1999: 17).

In contrast, one of the “core” tenets of Post Keynesianism is the empirically grounded notion that agents face fundamental uncertainty and that this affects economic life (Downward 1999: 21).

Downward is also clear that critical realism – even in Sheila Dow’s “pluralist” version – does not entail postmodernism (Downward 1999: 19; 24).

Critical realism implies a realist view of the external world and a correspondence theory of truth (Downward 1999: 23–24).

In trying to explain prices, Downward emphasises that economic agents face uncertainty, expectations are very important in decision making, and institutions, customs and conventions have a strong influence on economic life (Downward 1999: 39).